529 Essentials: Financial Aid FundamentalsBy Paul Curley | email@example.com | July 11, 2016
The value of higher education continues to rise based on current and projected wages, salaries, employment benefits, unemployement levels and job versatility.
The value of higher education continues to rise based on current and projected wages, salaries, employment benefits, unemployement levels and job versatility. In order to pay for high education, the three sources of college affordability are paying from current income, paying from savings and borrowing student loans. Due to the high rate of tuition inflation, more and more families are unable to pay from current income and the average family is not saving enough to pay from savings. Therefore, more and more families are relying on student loans to fund higher education expenses. In order to apply for federal student loans, parents need to fill out the Free Application for Federal Student Aid (FAFSA) by the U.S. Department of Education. The basic formula that the FAFSA is looking to calculate is Cost of Attendance (COA) – Expected Family Contribution (EFC) = Financial Aid.
— Cost of Attendance (COA): Based on the cumulative cost of going
to college including tuition and fees, on campus room and board, books
and other costs.
—- Expected Family Contribution (EFC): The number generated by FAFSA based on assets and income of parents and the student. The value remains approximately the same from school to school, and includes work-study earnings.
— Financial Aid: This number consists of both gift aid such as grants and self-help aid such as federal loans, private loans and on-campus work study.
While colleges and universities are not required to cover the complete financial aid need in its financial aid package, the majority of the student loan packages are typically student loans which need to be paid back as opposed to grants or scholarships which typically do not need to be paid back. Also, please note that while this article focuses on the FAFSA, some colleges and private scholarship programs may also require additional forms and applications such as the CSS Financial Aid PROFILE.
Overview of FAFSA: The most important components of the FAFSA calculation are assets and income of parents and the student. For students, 50% of income above protected amount of $6,260 are included in the calculation, as well as 20% of assets in bank accounts, CDs, UGMAs/UTMA’s and other savings vehicles. For parents, 22%-47% of Adjusted Gross Income above the protected amount are included, as well as 5.64% (or less) of non-retirement assets above protected amount, including 529s, investments and savings. One additional component is grandparents, aunts, uncles and other family members. While 0% of income and assets are included in the FAFSA calculation, withdrawals for college by grandparents and other family members may be considered student income and must be reported on the following year’s financial aid forms. Such income can reduce the amount of aid by up to 50%. Also, distributions from parent’s retirement accounts are treated the same at up to 50% of the value in the following year’s financial aid form.
Therefore, 529s provide beneficial financial aid treatment as they are treated as a parental asset when held by the parent, which only impacts the expected family contribution at a rate of up to 5.64%, compared to 20% of assets held in the name of the student. Also, withdrawals from a 529 do not impact financial aid as they are not counted as income.
Next, we will cover alternative funding options, and how different investment vehicles impact FAFSA.